Thursday, June 12, 2008

(Note: This write-up is prefaced by a post on investing in publicly traded professional sports teams found here, right below this post).

If someone gave you the opportunity to buy a stake in the Chicago Cubs, would you do it? How about the San Antonio Spurs? Or, *insert popular and/or successful team here*. The point is, I think everyone out there, regardless of what team they are a fan of, knows a successful franchise when they see it. And, as investors, we wouldn't turn down the opportunity to invest in such a thing. Now, Tottenham Hotspur aren't quite as dominant as the New England Patriots or New York Yankees, but they're generally the 5th or 6th best team in their league. So, think of a team that is generally 5th best overall in any given American league, and ask yourself if you would buy a stake in them if you had the opportunity. My point is: to most investors, investing in professional sports teams is usually off limits because they are private entities (not publicly traded) and you don't have the millions on hand to buy these teams. However, in England, this is not the case. Some of their teams are still publicly traded companies and you can buy as little as 1 share.

I'm an avid football/soccer fan and a regular follower of the English Premier League. So, my homework is already done, as I've been following the league for years and I know many teams inside and out. So, teams that can be bought on the London Stock Exchange are limited to: Sheffield United (SUT.L), Tottenham Hotspur (TTNM.L), Birmingham City (BMC.L), and Watford (WFC.L). Now, right off the bat we're limited in our options because we want to be buying teams who compete in England's top division, the Barclays Premier League. Sheffield United and Watford compete in the second division, so we don't want them. And, we don't want Birmingham City either because they've just been relegated down into the 2nd division this past season after a horrible performance in the Premier League. So, that leaves us with one option: Tottenham Hotspur. And, surprisingly, having only 1 option to invest in is not a bad thing at all, considering how well positioned Tottenham actually is. And, here's why:

1. Tottenham continually finish in the top half of the league and usually finish anywhere from 4th-8th place, just outside what is known as the "Big 4": Manchester United, Arsenal, Liverpool, & Chelsea. And, since all the above teams are already private, Tottenham are actually our best choice based on team performance should an outside buyer want to purchase them. On paper, they are the best available option in terms of available publicly traded buyout candidates. This past season was full of turmoil for them due to mid-season coaching changes and player transfers. But, now that they are building up their squad, they are ready to compete again.

2. They have a strong fan base & thus a strong revenue stream. Tottenham finished 3rd overall in terms of "Best supported Premier League Teams," behind only Arsenal and Manchester United. Tottenham Hotspur's White Hart Lane (their stadium), saw the total amount of people that attended matches last season: 683,370, an average attendance of 35,967 in a stadium with a capacity of 36,247. This means that their stadium was 99.23% full throughout the season. Again, I want to emphasize that Tottenham are 3rd in the entire Premier League (20 teams) in terms of best supported clubs. They definitely have strong revenue streams.

3. They've made some great acquisitions as of late. First, they brought in their new coach this season: Juande Ramos. He has previously won numerous UEFA Cup titles with his old club Sevilla, provides new hope. Secondly (and more importantly), they've signed Luca Modric from Croatia and Giovanni Dos Santos from Mexico, two promising young stars who've already proven they have talent. Basically, they've signed two very good attacking players who can only get better in order to complement the core of players they already have.

4. The stock itself is up 15% over the past year, and 664% over the past 5 years. Yes, that's correct, 664%. This reflects the growth of the Premier League itself as well as Tottenham's emergence as '5th or 6th best.' I say that mockingly because breaking into the Top 4 of English football is quite hard to do, as those teams are immensely talented. However, with Tottenham's recent signings, they are definitely sending signals that they are here to compete and are here to break into the top echelon of teams in the league.

5. Takeover rumors have begun to swirl over the past few years. The number being tossed around in one of the other rumored takeovers was £400 million, while the club currently has a market cap of £121 million. Believe it or not, there were rumors at one point that Phoenix Suns' guard Steve Nash wanted to buy the team (it's his favorite football club). After all, they are now the only publicly traded team left in the Premier League. If the trend continues, that won't last for long and they'll be bought out. And, the main part of this investment thesis was based on the identification of this buyout trend.

6. Two groups already have somewhat prominent stakes in the club, so they might want to takeover the club themselves, and a foreign buyer might not even be necessary. The current chairman's group, Enic, is the club's largest shareholder with 32% of shares. Secondly, Sir Alan Sugar, the former chairman, owns 14.6% of the shares. So, in addition to possible foreign buyers, you've got some large stakeholders who could possibly launch a bid as well.

At the same time, there are some barriers to entry & some possible downsides to this investment which need to be detailed.

1. Liquidity. It is only available on the London Stock Exchange or the Over the Counter (OTC) markets. And, unfortunately, if you're in America, this presents you with a problem. Even if you have an E-trade account with global trading, you still can't purchase TTNM because it does not trade directly on the London Stock Exchange, it trades on a secondary exchange (think ARCA for NYSE). E-Trade only lets you trade on the main exchange so this option does not exist for American investors. Secondly, even if it was available, this thing is not very liquid at all. Today, it traded just barely over 2000 shares. So, the only option American Investors are left with is to go with the OTC version: TTTHF. This trades just like the TTNM stock. But, you won't be able to track it easily since its OTC. For instance, if you pull a quote up for this, it shows that there is no volume, weird bid/asks, etc. Additionally, numerous brokerages won't let you buy OTC foreign ordinaries, so make sure you check with your brokerage.

2. Stock coverage. Over here in the states, you won't get the daily updates surrounding this name seeing as it trades in England. So, you'll have to take a proactive approach if you want to monitor the possible takeover situation. Not to mention, you'll want to keep an eye on the League Table/Standings, to see how well the team is performing (seeing as the stock will trade slightly based on how well they play). So, if you're not a soccer fan, this could become a burden. Not to mention, you can't even really track the equity you're technically invested in, TTTHF. You'll have to keep track of TTNM, the one that trades in London.

So, wrapping up. This is definitely not an investment for everyone considering the barriers to entry and the task of tracking developments. We have to evaluate this name by a different set of metrics simply because it trades differently than most equities. The closest comparison I can think of is biotech/biopharma stocks. Often times, biotech stocks trade on future pipeline and FDA approval, so you have to evaluate those equities in a slightly different manner. Tottenham is even more odd in that it trades on performance of the team, player signings/transfers, & possible takeover rumors/bids. Although the finances do of course matter, they play second fiddle to all the things just mentioned. I'm confident in this name because I'm an avid football/soccer fan and I have followed the league for years now. I am not biased because I'm not a fan of Tottenham. In fact, I'm actually a fan of a completely different team. So, favoritism obviously played zero role in my decision. I tried to look at things objectively from an outside , neutral perspective. Tottenham are easily the best available publicly traded football club left. And, even if there were more options for us in terms of publicly traded teams, I'd still choose TTNM.L/TTTHF simply because they're consistently in the top 33% in the league, they have a very strong fan/revenue base, and are the best possible option right now. Not to mention, reatil investors will never have a realistic chance of investing in the top 4 teams in the league (ManUtd, Arsenal, Chelsea, Liverpool).

This thesis is mainly based on a rising secular trend. We've seen increasing foreign ownership in Premier League clubs as new ownership groups take these clubs private. While this trend is gradually rising, we have to highlight that this is an event driven play and the timeframe for a catalyst is obviously unknown. While Tottenham has a lot of potential as a buyout target, there are other factors to consider. As always, do your due diligence before investing and see our disclaimer at the bottom of the site.

yea i've never traded OTC either, so that's why i just took a tiny position just to test things out and see how stable/illiquid it really is.

your path sounds like a damn good one to me haha. when you get that rich, how about letting me tag along in the purchase. you can pay for the 99.99% stake and i'll pay you for a 0.01% stake, since that's probably all i'll be able to afford haha.

I'll buy Ronaldo, Messi, Van Persie, Lampard, Carvalho, Terry since those are my 5 favorites, and just to be American will bring Howard as the GK. Convince Donovan he'd like to play in Europe since he sucked the last time around but he should be a good 10-15 sub with his speed and then throw in Dempsey as a sub of a sub, so I have 3 Americans. (of course 2 would only play 5-10 minutes a game at most)

Then you can fill in the rest of the roster.

p.s. i saw Messi 2-3 years ago at a U-20 or U-19 tournament (it was in Canada) and I said this is the next superstar. Nailed it. Love this kid.

He is a bargain at 100M pounds. The women love him (jersey sales) and thats only 2.5M pounds per 41 goals or so.

Should I buy Fulham? they already are half American. Actually it would be best to buy someone 1 division down and take all these guys down there, destroy the league and then move up. That would be fun.

ya they definitely would sell tons of jerseys. but, there's no guarantee he'd score that many again, especially given a new league/teammates, etc. don't get me wrong though, i wouldn't bet against him he's that good haha

and buy fulham? why not haha. they've narrowly escaped relegation this year so you can probably get a discount. they are becoming less american by the day though... mcbride coming back to the states, keller's contract up in the air, bocanegra released. looks like its just dempsey and johnson for now.

and actually re: buying someone a league down, an american investment group just bought out Derby County, who were in last place in the premier league and were guaranteed to go down to the the 2nd division. obviously they bought it as a long term investment because that team has a huge fan base. they completely sucked yet the stadium was packed each game.

Was just surfing around and found your article and, after reading your reasons for buying Tottenham, had to laugh a bit looking back. Hindsight is always 20/20, and who would have seen them in a relegation battle this year (except us Gooners!). Not sure if you've followed up anywhere on this post, but I'd love to know how you're doing with it. Thanks!

hey Gregor, thanks. yea bit wild of a season isn't it? was more of a fun investment than anything. and, its long term since my ultimate goal is to see tottenham bought out and taken private like many of the other clubs.

the credit crunch has obviously put a damper on all that activity and not to mention spurs have sucked it up this year and have been like a rotating door with players and managers. I'm down substantially on the position, but it is in my long-term account and is literally only a tiny, tiny portion of my portfolio.

Good thought on writing a follow-up, I'll do that once the season ends and hopefully once they've fought off relegation haha.

Love to see other premier league fans, even if it is a gooner! (I've been a ManUnited fan ever since I was 13).

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